Small businesses are a constant target for individuals with a “get rich quick” mind set. However, there are certain practices these small businesses should put in place in order to lessen the risk of a lawsuit. This includes hiring only after excessive screening, implementing policies that prohibit discrimination and workplace harassment, consulting legal counsel before terminating an employee, and many other practices. “A small business owner has to be the leader of his or her family of employees – you have to be fair but firm. You have to enforce the rules in an even-handed manner. If you do that, you can stay out of trouble” (Hardin, 2000).
Liability Insurance
Small businesses owners face many obstacles to remaining viable, one of which are frivolous and legitimate lawsuits. According to Jackson (2003) “On average, every time a small-business owner gets taken to court - win, lose or draw - the cost is more than $100,000” (para. 4). The fear of getting sued has made litigation insurance extremely important to small business owners. Bowers (2005) said, “We’re seeing EPL (Employee Practices Liability) becoming a standard coverage that many companies—public or private, large or small—are feeling they have to have because of the litigation picture” (para. 4). For small businesses to survive the owners should be prepared for potential lawsuits.
Unlike many large businesses that have legal representation to defend themselves, small businesses must purchase liability insurance or accept exposure to lawsuits. Small businesses that have liability insurance and are sued could face rising insurance premiums regardless of the lawsuit’s merit. In a poll by the National Federation of Independent Business, nearly 50% of small business owners involved in a lawsuit were strongly urged by the insurance carrier to settle the case out of court (William, 2004, p. 4). The business is then penalized with higher insurance premiums. To avoid this, some owners elect to defend their business without the assistance of their insurance carrier. However, this activity costs the owner in terms of time to defend the suit. This negatively impacts the business because the time normally spent to enhance productivity and profit, is now absorbed by the litigation process (William, 2004, p. 5).
Minimum Wage
Public Union leaders, welfare recipients, women's organizations, advocates of the working poor, and liberals use the following arguments for occasional minimum wage increases: it decreases wage inequalities, it does not cause unemployment and serves “to 'shock' low-paying employers into upgrading products and processes in order to achieve compensating productivity increases” (Heyes, 2003, p. 77). Conservatives and small business owners, on the other hand, use the following argument against a minimum wage increase: it will cause unemployment and small business failures because added labor costs will exceed the profits generated by a product or service.
The study performed by the Levy Institute in 1999 found no evidence to support the allegation of massive unemployment. The Levy Institute interviewed 536 small businesses in 1999 and asked them specific questions on the affects of the minimum wage legislation. According to Oren Levin-Waldman (1999), in his assessment of the survey, “Of the 72 firms (13.4 percent of the total number surveyed) . . . (15.3 percent) said they would be forced to lay off workers” (p. 89). The survey suggested that small businesses were more likely to stop hiring additional workers than lay off current workers. A study performed by Jason Heyes and Alex Gray (2003) further collaborated this fact and found small businesses would instead increase their training to offset the labor costs. They concluded that a minimum wage “provided a stimulus to the training effort of small enterprises through what might be referred to as a 'shock effect'” (p. 84). A study conducted by Jerold Waltman, Allan McBride, and Nicole Cambout for the Journal of Economics Issues (1998), concluded that “there seems to be no discernible correlation between minimum wage increases and a rise in business failures” (p. 221). In fact they found the evidence leaned the other way and suggested that there must be other variables in play to explain the failures. Perhaps they are referring to the 'shock' affect (Heyes, 2003).
Oren Levin-Waldman does warn of not reaching “a ‘tipping point’ at which considerable negative employment consequences will begin to occur” (p. 87). This “tipping point” will occur when the minimum wage approaches the “market-clearing wage” (p. 95).
The findings of these individual studies suggest there is no evidence to support the negative impacts as advocated by the conservative groups. An occasional minimum wage hike, which stays clear of the market-clearing value, does not cause an increase in business failures compared to any other normal year, and does not cause massive unemployment. Therefore, these conservatives’ views should be disregarded.
Regulatory Laws
The regulatory laws that are being implemented today are not fair for small businesses. A great deal of regulatory laws, which small businesses do not play a part in developing, cause small businesses to fail because of strict guidelines. According to Tom Sullivan, more often small businesses are focused on deadlines, heavy workloads, and trying to comply with the wishes of the administration in power. There is not enough attention paid to how a law will affect a small entrepreneur. A recent study funded by Sullivan's office showed that firms with fewer than 20 employees spend about twice as much on regulatory compliance per employee as the owner’s larger counterparts ( 2003).
According to a government advisor, most regulatory laws that are designed to cut regulation and support small businesses are not worth the paper they are written on. The Small Business Council has demanded an overhaul of rules aimed at forcing civil servants to consider the impact of new laws on businesses. Recent rules do not take in effect the cost that a small business will occur. The government needs to be aware of the impact that legislation has on the costs of small business. (Judge, 2004, p. 48)
Conclusion
Litigation affects small businesses in America in a variety of ways. The constant rise in insurance premiums by litigation lawsuits has caused small businesses to stumble. The insurance premium cost is second only to health care insurance cost. Based on this research, other contributing factors which continue to be a challenge for small businesses are minimum wage regulation, regulatory laws, and tax laws.
References
Bowers, B. (2005). Working up a suit. Best's Review. Retrieved January 17, 2005, from EBSCOhost database.
Skrzycki, C. (2003, January 21). A big voice for small business. The Washington Post. p. E.01.
Judge, E. (2004, November 24). State policies ‘fail small businesses’. The Times, p. 48. Retrieved January 17, 2005, from ProQuest database.Hardin, M. (2000) Labor pains. Georgia Trend. 15(7), 49
Heyes, J., & Gray, A. (2003). The implications of the national minimum wage for training in small firms. Human Resource Management Journal, 13(2), 76-86.
Hopper, M. (2001) Small business threatened by uncontrolled suits. San Diego Business Journal, 22(15), 47. Retrieved January 17, 2005, from EBSCO Host database.
Levin-Waldman, O. (2000). The minimum wage can be raised. Challenge, 43(2), 86. Retrieved January 17, 2005, from EBSCO Host database.
Jackson, T. (2003). Litigation reform helps small business. Retrieved January 17, 2005, from http://www.nfib.com/object/3912040.html
Waltman, J., McBride, A., & Camhout, N. (1998). Minimum wage increases and the business failure rate. Journal of Economic Issues, (1), 219-223.
William, D., (2004). NFIB National business poll:Insurance, 2(7), p 4-5. Retrieved February 14, 2004, from http://www.nfib.com/object/3608838.html
